Gold loan companies expect borrowings will rise in line with prices and the demand from semi-urban and rural areas will give boost business. Sachin Dave reports. Carat and stick

Not everyone is unhappy with the spiralling price of gold. Gold loan finance companies, which saw business slowing down after the Reserve Bank of India introduced a cap on the loan-to-value (LTV) ratio early this year, are cheering the phenomenon as it has boosted sentiments.

After hovering around Rs 29,000- 30,000 till June this year, gold prices breached the Rs 32,000 mark on Thursday.

"High prices induce people to pledge more gold because they get more money from the same quantity of gold," said K Padmakumar, executive director, Muthoot Finance, India’s largest gold loan company. "The rise in gold prices is a positive development for gold loan financing companies."

Concerned about the rapid growth of gold loan finance companies in recent years, RBI had in March put a cap of 60% on the LTV ratio for such firms. Gold loan finance companies, which had been lending up to 85% of the value of gold jewellery, were now not allowed to lend more than 60% of the value of the jewellery pledged.

Impacted by LTV cap, Muthoot Finance, which had average LTV ratio of 72% till March, saw its gold loan outstanding decline by 5% to Rs 23,000 crore as on June 30, 2012 from Rs 24,300 crore as on March 31, 2012.

Companies expect that the demand from semi-urban and rural areas will give boost business. “Compared to urban areas, more people come for loan against gold in semi-urban and rural areas,” said a senior official of a south India-based gold loan finance company.

“People in semi-urban and rural areas like to keep a major part of their savings in the form of gold because of low level of financial literacy. Gold loan companies benefit because of their better reach in these areas,” he said.